Latest news with #investment strategy
Zawya
22-07-2025
- Business
- Zawya
SWFs see geopolitical tensions as dominant short-term risks
Political and policy decisions have become core drivers of investment strategy, prompting sovereign investors to fundamentally reassess portfolio construction and risk management, according to the 13th annual Invesco Global Sovereign Asset Management Study. Geopolitical tensions (84%) remain the dominant short-term risks for sovereign wealth funds (SWFs) and central banks in the region, followed by a fallout from the Middle East conflict (68%), it said. An overwhelming majority (96%) of respondents believe that geopolitical rivalry will be a key driver of volatility, while 91% expect protectionist policies to entrench persistent inflation across developed economies. Most notably, 52% of Middle East SWFs now see deglobalisation as a material threat to investment returns, underscoring a marked shift in the market narrative. Invesco's study, a leading indicator on sovereign investor behaviour, draws on the insights from 141 senior investment professionals, including chief investment officers, heads of asset classes, and portfolio strategists, from 83 SWFs and 58 central banks across the world, collectively managing $27 trillion in assets. Active strategies gain traction One of the key shifts in portfolio construction identified in the study is the greater use of active strategies by respondents. On average, Middle East SWFs maintain 78% of their equities portfolio and 77% of their fixed income portfolio in active strategies. The survey shows that 33% of SWFs in the region are planning to increase active equity exposures over the next two years, with 50% doing the same with fixed income. While passive strategies continue to provide efficiency and scale benefits, particularly in highly liquid public markets, active approaches are being used to address index concentration risks, navigate regional dispersion, and enhance scenario resilience in an increasingly fragmented landscape. At the same time, portfolio construction decisions such as asset class, geographic, and factor tilts are increasingly viewed as core expressions of active management. Fixed income redefined and reprioritised Due to a combination of geopolitical shifts and interest rate normalisation, traditional portfolio construction models are being rethought, with many SWFs turning to more dynamic portfolio approaches that includes more fluid asset allocations, enhanced liquidity management, and greater use of alternatives. Within this landscape, fixed income has assumed a new importance within SWF portfolios, becoming the second-most favoured asset class behind infrastructure. On a net basis, 30% of Middle East SWFs plan to increase their fixed income exposure over the next 12 months. 'Amid geopolitical uncertainty and market shifts, investors across the Middle East are recalibrating their strategies,' says Josette Rizk, Head of Middle East and Africa at Invesco. 'Active asset management is growing in prominence due to its adaptability to a rapidly evolving economic environment. While private credit holds on to its popularity, fixed income has rebounded as the region's SWFs diversify exposures.' Private credit takes centre stage Private credit continues to gain momentum among SWFs in the Middle East, with 63% accessing the asset class through funds and 50% making direct investments or co-investments. The survey indicates that 50% of SWFs worldwide, including 40% of those based in the Middle East, plan to increase allocations to private credit over the next year. This growing interest reflects a broader rethinking of diversification as traditional stock-bond correlations erode in a higher-rate, higher-inflation environment. Sovereign investors are turning to private credit for floating-rate exposure, customised deal structuring, and return profiles that are less correlated with public markets. Once considered a niche asset class, private credit is now viewed as a strategic pillar of long-term portfolio construction. China remains a high priority SWFs are taking a more selective approach to emerging markets. Asia (excluding China) is a high priority for 43% of respondents worldwide and 25% in the Middle East. Meanwhile, China is once again an important focus for 28% SWFs globally and 33% in the Middle East, with 60% of the region's SWFs expecting to increase China allocations over the next five years. SWFs are increasingly orientating their China strategies around specific technology sectors, such as AI, semiconductors, EVs, and renewables, with 80% of respondents in the region believing the country's technology and innovation capabilities will become globally competitive in the future. 'Middle East SWFs are focusing a large proportion of their portfolios on Asian economies,' adds Rizk. 'Based on the outcomes of our study, we anticipate rising investment flows between the Middle East and China, with higher growth potential in selected sectors.' Active management is viewed as essential in this environment. Just 25% of Middle East SWFs rely on passive emerging market (EM) strategies, while 73% access EMs through specialist managers, citing the need for local insight and tactical flexibility. Digital assets, continued exploration Digital assets are no longer seen as an outsider topic among institutional investors. This year's study shows a small but notable increase in the number of SWFs that have made direct investments in digital assets – 11%, compared to 7% in 2022. Allocations are most common in the Middle East (22%), Asia Pacific (18%), and North America (16%), in contrast with Europe, Latin America, and Africa, where they remain at 0%. For Middle East SWFs, the biggest barriers to investing in digital assets include regulatory challenges (100%) and volatility (86%). 'Investors are increasingly open to exploring the value digital assets may add to their portfolios,' says Rizk. 'In the Middle East, allocations are growing cautiously as investors balance new opportunities with regulatory challenges and market volatility.' Globally, central banks are simultaneously advancing their own digital currency initiatives, balancing innovation potential against systemic stability considerations. While no central bank respondents in the Middle East have launched a digital currency yet, 33% are considering it, viewing efficiency in payments (100%) and enhanced financial inclusion (44%) as the biggest benefits of central bank digital currencies (CBDCs). Central bank resilience and gold's defensive role Central banks are reinforcing their reserve management frameworks in response to mounting geopolitical instability and fiscal uncertainty. In the Middle East, 67% plan to increase their reserve holdings over the next two years, while 27% intend to diversify their portfolios. Gold continues to play a critical role in this effort, with 63% of central banks in the region expecting to expand their gold allocations over the next three years. Seen as a politically neutral store of value, gold is increasingly viewed as a strategic hedge against risks such as rising U.S. debt levels, reserve weaponisation, and global fragmentation. At the same time, central banks are modernising how they manage gold exposures. In addition to physical holdings, an increasing number are turning to more dynamic tools, such as exchange-traded funds (ETFs), swaps, and derivatives, to fine-tune allocations, improve liquidity management, and enhance overall portfolio flexibility without sacrificing defensive protection. This is expected to continue, with 21% of central banks globally and 25% in the Middle East saying they plan to hold investments in gold ETFs in the next five years, while 19% worldwide and 25% in the region intend to hold gold derivatives, the report said. - TradeArabia News Service Copyright 2024 Al Hilal Publishing and Marketing Group Provided by SyndiGate Media Inc. (
Zawya
21-07-2025
- Business
- Zawya
Mideast investors rethink strategies amid geopolitical uncertainty
Political and policy decisions have become core drivers of investment strategy, prompting sovereign investors in the Middle East to fundamentally reassess portfolio construction and risk management, according to the thirteenth annual Invesco Global Sovereign Asset Management Study. Geopolitical tensions (84%) remain the dominant short-term risks for sovereign wealth funds (SWFs) and central banks in the region, followed by a fallout from the Middle East conflict (68%). An overwhelming majority (96%) of respondents believe that geopolitical rivalry will be a key driver of volatility, while 91% expect protectionist policies to entrench persistent inflation across developed economies, stated Invesco in its study. Most notably, 52% of Middle East SWFs now see deglobalisation as a material threat to investment returns, underscoring a marked shift in the market narrative. Invesco's study, a leading indicator on sovereign investor behaviour, draws on the insights from 141 senior investment professionals, including chief investment officers, heads of asset classes, and portfolio strategists, from 83 SWFs and 58 central banks across the world, collectively managing $27 trillion in assets, it stated. One of the key shifts in portfolio construction identified in the study is the greater use of active strategies by respondents. On average, Middle East SWFs maintain 78% of their equities portfolio and 77% of their fixed income portfolio in active strategies. The survey shows that 33% of SWFs in the region are planning to increase active equity exposures over the next two years, with 50% doing the same with fixed income. While passive strategies continue to provide efficiency and scale benefits, particularly in highly liquid public markets, active approaches are being used to address index concentration risks, navigate regional dispersion, and enhance scenario resilience in an increasingly fragmented landscape. At the same time, portfolio construction decisions such as asset class, geographic, and factor tilts are increasingly viewed as core expressions of active management, it added. Due to a combination of geopolitical shifts and interest rate normalisation, traditional portfolio construction models are being rethought, with many SWFs turning to more dynamic portfolio approaches that includes more fluid asset allocations, enhanced liquidity management, and greater use of alternatives. Within this landscape, fixed income has assumed a new importance within SWF portfolios, becoming the second-most favoured asset class behind infrastructure. On a net basis, 30% of Middle East SWFs plan to increase their fixed income exposure over the next 12 months, it added. "Amid geopolitical uncertainty and market shifts, investors across the Middle East are recalibrating their strategies," remarked Josette Rizk, the Head of Middle East and Africa at Invesco. "Active asset management is growing in prominence due to its adaptability to a rapidly evolving economic environment. While private credit holds on to its popularity, fixed income has rebounded as the region's SWFs diversify exposures," she noted. Private credit continues to gain momentum among SWFs in the Middle East, with 63% accessing the asset class through funds and 50% making direct investments or co-investments. The survey indicates that 50% of SWFs worldwide, including 40% of those based in the Middle East, plan to increase allocations to private credit over the next year. This growing interest reflects a broader rethinking of diversification as traditional stock-bond correlations erode in a higher-rate, higher-inflation environment. Sovereign investors are turning to private credit for floating-rate exposure, customised deal structuring, and return profiles that are less correlated with public markets. Once considered a niche asset class, private credit is now viewed as a strategic pillar of long-term portfolio construction. SWFs are taking a more selective approach to emerging markets. Asia (excluding China) is a high priority for 43% of respondents worldwide and 25% in the Middle East, stated Invesco in the study. Meanwhile, China is once again an important focus for 28% SWFs globally and 33% in the Middle East, with 60% of the region's SWFs expecting to increase China allocations over the next five years. SWFs are increasingly orientating their China strategies around specific technology sectors, such as AI, semiconductors, EVs, and renewables, with 80% of respondents in the region believing the country's technology and innovation capabilities will become globally competitive in the future. "Middle East SWFs are focusing a large proportion of their portfolios on Asian economies,' noted Rizk. 'Based on the outcomes of our study, we anticipate rising investment flows between the Middle East and China, with higher growth potential in selected sectors," she noted. Active management is viewed as essential in this environment. Just 25% of Middle East SWFs rely on passive emerging market (EM) strategies, while 73% access EMs through specialist managers, citing the need for local insight and tactical flexibility. Digital assets are no longer seen as an outsider topic among institutional investors. This year's study shows a small but notable increase in the number of SWFs that have made direct investments in digital assets – 11%, compared to 7% in 2022. Allocations are most common in the Middle East (22%), Asia Pacific (18%), and North America (16%), in contrast with Europe, Latin America, and Africa, where they remain at 0%. For Middle East SWFs, the biggest barriers to investing in digital assets include regulatory challenges (100%) and volatility (86%). "Investors are increasingly open to exploring the value digital assets may add to their portfolios," stated Rizk. "In the Middle East, allocations are growing cautiously as investors balance new opportunities with regulatory challenges and market volatility," she added. Globally, central banks are simultaneously advancing their own digital currency initiatives, balancing innovation potential against systemic stability considerations. While no central bank respondents in the Middle East have launched a digital currency yet, 33% are considering it, viewing efficiency in payments (100%) and enhanced financial inclusion (44%) as the biggest benefits of central bank digital currencies (CBDCs). Central banks are reinforcing their reserve management frameworks in response to mounting geopolitical instability and fiscal uncertainty. In the Middle East, 67% plan to increase their reserve holdings over the next two years, while 27% intend to diversify their portfolios. Gold continues to play a critical role in this effort, with 63% of central banks in the region expecting to expand their gold allocations over the next three years. Seen as a politically neutral store of value, gold is increasingly viewed as a strategic hedge against risks such as rising US debt levels, reserve weaponisation, and global fragmentation. At the same time, central banks are modernising how they manage gold exposures. In addition to physical holdings, an increasing number are turning to more dynamic tools, such as exchange-traded funds (ETFs), swaps, and derivatives, to fine-tune allocations, improve liquidity management, and enhance overall portfolio flexibility without sacrificing defensive protection. This is expected to continue, with 21% of central banks globally and 25% in the Middle East saying they plan to hold investments in gold ETFs in the next five years, while 19% worldwide and 25% in the region intend to hold gold derivatives. Copyright 2024 Al Hilal Publishing and Marketing Group Provided by SyndiGate Media Inc. (
Yahoo
18-07-2025
- Business
- Yahoo
How to build a bond ladder — and the best brokers to help you do it
A bond ladder is an investment strategy that involves purchasing multiple bonds that mature at different times. The ladder analogy is an apt visual tool to describe how bond ladders work: Each rung of the ladder represents a bond, with the lowest step occupied by whichever bond is due to mature the soonest. When that happens, money is freed up to spend, invest elsewhere or reinvest in a new bond to extend the ladder upward. The biggest advantage a bond ladder has over investing in a single bond is that it allows investors to manage shifting market conditions and changing interest rates while maintaining a steady flow of income. How to build a bond ladder There are five main steps involved in building a bond ladder. Identify your overall timeframe: Determine the time span you want your bond ladder to cover, starting with when you first need to draw income from your investments and ending with the furthest date out (typically a number of years in the future). This is where you'll land on the overall length of your ladder (e.g., a five-, seven- or 10-year bond ladder). Choose how many rungs you want your ladder to have: This starts with your income needs: How frequently will you need access to your money? Every year? Every two years?For example, if you want to draw income from your investments for the next decade, your 10-year ladder could have five rungs of bonds that mature every two years. Want more frequent access to cash? Then you'd compress the time between intervals and purchase 10 bonds with maturity dates staggered annually across that timeframe. Purchase bonds for each ladder rung: Here you'll divide your total investment amount by the number of bonds you're purchasing. So a $50,000, five-year bond ladder with five rungs would require investing $10,000 in each bond, for example. To account for different maturity dates, you'd purchase a mix of short-term and long-term bonds. Sit back and let your money grow: To avoid transaction fees and receive the full benefit of a bond (such as protection from interest rate fluctuations and steady income flow), you'll want to hold each bond until it matures. Once your ladder is built, your main job is to hold each one for the full term and collect interest payments along the way. Decide whether to spend, reinvest or deploy your money elsewhere: As each bond matures, choose what to do with your principal — reinvest it into a new bond at the top of your ladder, invest the money elsewhere or use the cash to cover more immediate living expenses. Variety is what makes bond ladders a valuable tactical tool. As with other assets, spreading your investment dollars around (aka, diversification) helps to reduce your exposure to risk and may lead to higher returns. When it comes to diversifying within a bond portfolio, there are a few factors to consider. Bond type: U.S. Treasurys, municipal bonds and corporate bonds are the main types investors use to create bond ladders. (See Bankrate's full rundown of the types of bonds, including international bonds, agency bonds and high-yield (or junk) bonds.) Credit quality (aka bond ratings): Higher-rated bonds are generally preferred as they ensure preservation of capital, a more reliable stream of income and predictable value at maturity. Maturity dates: A range of maturity dates (months or years from the time you invest) provides exposure to different interest rate environments. Interest rates: A combination of the factors above as well as the prevailing interest rate environment determine a bond's interest rate, or coupon rate. Tactics for different rate environments When interest rates rise, an investor can reinvest the proceeds from maturing bonds to take advantage of higher yields. Conversely, if rates fall, the investor still retains higher-yielding bonds within the ladder, helping to smooth out the effects of market volatility. Best brokers to build a bond ladder The best broker for bond ladders depends on your budget and where you fall on the do-it-yourself/manage-it-for me spectrum. Brokers with ladder-building tools and resources DIY investors can purchase individual bonds through a discount broker or buy direct from the U.S. Treasury at Treasury Direct. Trading costs and access to ladder-building tools, research and screening tools and low costs are a must since this approach requires a bit of legwork (e.g., selecting multiple bonds for your ladder and rolling your money into a new bond when each matures). These brokers are standouts in key areas that matter to bond investors: Charles Schwab, Fidelity, Merrill Edge, E-Trade and J.P. Morgan Self-Directed Investing. They charge $0 to trade U.S. Treasurys and low fees on other bonds. Their investing platforms provide free access to bond portfolio building and management resources. Bond laddering tools: Schwab's CD & Treasury Ladder Builder, Fidelity's Bond Ladder Tool and E-Trade's Bond Ladder Builder make easy work of structuring a bond portfolio based on your timeline risk preferences. Bond screeners: All of these brokers offer basic and advanced screening tools to assist in identifying bonds that align with your investment objectives. Bond resources and market commentary: The best brokers for bonds provide a range of resources for investors at every level, including education on the basics of bonds and access to expert commentary and market news, Client support: In addition to on-call technical help, these established brokers have dedicated teams of fixed-income specialists to assist customers with every step of the process of building a bond ladder. See: Best brokers for bonds for more on commissions and available investments Platforms that offer automated bond laddering At the other end of the spectrum are firms that handle all the logistics for you. Wealthfront earns high marks for taking all the headaches out of building a bond ladder. The robo-advisor's Automated Bond Ladder handles the buying and reinvesting based on the ladder length (anywhere from three months to six years) you choose. Ladders are built with a mix of U.S. Treasuries (bills and notes), and customers can turn the automatic reinvesting feature off at any time. Wealthfront charges a 0.15 percent annual advisory fee on bond ladders to handle the heavy lifting. For context, Wealthfront charges a 0.25 percent annual fee for its automated portfolio management service. The $500 minimum initial deposit requirement ($100 minimum for subsequent deposits) and 0.15 percent annual advisory fee make this an appealing and affordable option for investors looking for a simple way to use the bond ladder strategy. Public is another option for investors who want a little or a lot of bond ladder management help. The broker's Treasury Account lets customers invest in either pre-built or self-built Treasury ladders that are automatically reinvested at maturity or made available for cash withdrawals. Maturities range from three months to 30 years. You can get started with a Treasury Account at Public for $1,000. The broker's tiered management fee (0.09 percent to 0.29 percent) applies to different portions of the portfolio based on asset amounts. Smaller accounts pay the higher management fee (0.29 percent on the first $25,000) with additional amounts subject to lower fees (e.g., 0.24 percent applies to the next $75,000-$100,000 and so on). Brokers that offer fractional bond investing The high cost of investing directly in bonds — versus buying a bond ETF — can make it difficult for investors with smaller wallets to get started. Minimum investment requirements typically start at $1,000 and can be much higher for corporate and municipal bonds. Although fractional stock investing has become more widely available via discount brokers, only a few brokers have ventured into fractional bond investing, offering a way to buy a portion of a bond for as little as $100. Two brokers stand out for their low-dollar entrée into bond investing. Webull: The broker currently offers fractional share investing in Treasurys with a minimum initial investment of $100 and plans to expand into a subset of corporate and municipal bonds in the future. Public: The menu of fractional bonds at Public includes more than 90 corporate bonds and roughly 100 Treasury bonds available for as little as $100 to start. Ladders, barbells and bullets Ready to go beyond a basic bond ladder? Learn more about these time-tested bond investing strategies. Pros and cons of a bond ladder strategy Building a bond ladder comes with both potential benefits and drawbacks. Often, the balance between these can be influenced by external factors such as market conditions and the individual investor's financial goals. Pros Risk management: Bond ladders spread the risk of interest rate fluctuations across several bonds with different maturity dates. This reduces the impact of any single change in interest rates on the entire portfolio. Predictable income stream: As each bond within the ladder matures, it provides a known amount of income. This can be particularly helpful for those with predictable upcoming expenses or who rely on their investments for regular income. Retirees can even structure a bond ladder to provide monthly income. Opportunity for higher returns: As bonds mature, the proceeds can be reinvested into new bonds that may offer higher yields if interest rates have risen, potentially leading to higher returns. Long-term bonds typically offer higher rates than short-term bonds, so maturing bonds can be reinvested at the end of the ladder to take advantage of the higher potential returns. Flexibility: With a bond ladder, you have the flexibility to reinvest in different types of bonds as the market changes, allowing you to adapt to new market conditions. Cons Default risk: There's always the risk that the issuer of a bond could default, which could result in a loss. This risk can be mitigated somewhat through diversification and paying close attention to bond ratings as you build your ladder, but it's still something to keep in mind. Research complexity: Building a bond ladder requires a good deal of research to select the right bonds, determine the appropriate spacing of maturities and monitor the ladder regularly. Diversification risk: While a bond ladder can help diversify interest rate risk, it may not provide the same level of diversification as a bond mutual fund or bond ETF, which can spread risk across a larger number of bonds. Potentially high trading costs: Buying and selling individual bonds can come with higher trading costs, especially for smaller, retail investors. Individual bonds may also have minimum investment requirements higher than most bond funds. Capital gains limitation: Bond laddering typically involves holding bonds until maturity, which can limit the potential for capital gains that could be realized by selling a bond before maturity when its price has increased. As with any investment strategy, it's crucial to weigh these factors against your personal financial goals, risk tolerance and investment timeline. For some, the benefits of a bond ladder strategy may outweigh the potential drawbacks, while for others, an alternative approach (e.g., investing in bond funds) could be more suitable. Get matched: Find a financial advisor who can help you maximize your investments Bottom line A bond ladder is a flexible and strategic investment approach that can help you manage changing interest rates while ensuring a steady income. While there are potential drawbacks to consider, consulting with a financial advisor can help you weigh these against your personal situation and determine if a bond ladder is right for you. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Sign in to access your portfolio
Finextra
16-07-2025
- Business
- Finextra
Study reveals insurers reliance on AI for investment
Insurance investment managers and investment managers working for insurers are increasingly using AI to guide and improve their investment strategy as spending on new applications increases, a new global study* shows. 0 This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author. A survey from Ortec Finance, of investment managers responsible for $10.48 trillion assets under management, found nearly half (45%) believe AI will be critical to investment strategy and asset allocation within five years, with a further 48% expecting it to be of significant importance. The growing importance of AI for insurers is underlined by research from Ortec Finance, a leading global provider of risk and return management solutions for insurers, pensions funds and asset management companies. All firms surveyed expected their investment in AI to rise, with nearly half (49%) of respondents saying their organization's budget for AI applications will rise by 75% or more over the next 12 months. That comes on top of increased spending in the past 12 months – 90% of respondents said they had already boosted spending on AI applications over that period. Almost all (99%) currently use AI in the investment process with 91% having adopted it more than a year ago. Around a third (31%) have done so for more than two years. Around 60% say they use AI for evaluating investments, with 62% using it for client engagement and 55% using it for marketing. When asked where AI delivers the greatest value, (41%) point to investment evaluation while 21% say it has the biggest positive impact in risk management. Just one in eight (12%) say AI has the biggest positive impact in reducing operational costs. Marketing and client engagement was considered most impactful by16% of respondents, with 4% citing compliance and reporting. Hamish Bailey, Managing Director UK, and Head of Insurance & Investment said: 'AI is already being used in some form by insurers and investment managers, and looks like this will continue to grow. 'Within five years AI will play a critical or highly important role in investment strategy and asset allocation for nearly all organizations surveyed, a trend clearly reflected in plans to significantly increase budgets in the next 12 months. 'Given the strategic importance placed on the role of AI, it is crucial that companies can maximize their investments with access to appropriate tools and expertise.' Ortec Finance supports insurers and asset managers by providing advanced scenario analysis, balance sheet simulation, and portfolio optimization tools that take account of dynamic asset/liability interactions, liquidity and solvency constraints and help navigate market uncertainty to help make data-driven, resilient investment decisions.
Globe and Mail
14-07-2025
- Business
- Globe and Mail
This Mistake Could Cost Investors in 2025
Key Points Despite bullish economic headlines, factors such as labor participation and core inflation signal caution. Instead of relying on lagging indicators in isolation, analyze several metrics together to avoid costly investment traps. Microsoft and Broadcom are two resilient AI-powered stocks that are good picks in the current economic environment. 10 stocks we like better than Microsoft › Investors have gotten good news lately. The U.S. stock market reacted positively to a stable unemployment rate of 4.1 % in June 2025, which was lower than the expected 4.3%. A dip in the Consumer Price Index (a metric used to gauge inflation) from 3.3% in May 2024 to 2.4% in May 2025 helped alleviate concerns about inflation. The Federal Reserve held its benchmark interest rates steady between 4.25% and 4.50% in June 2025, while the next rate cut is likely scheduled for September 2025. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More » Against the backdrop of encouraging economic numbers and reduced concerns about tariff wars, the benchmark S&P 500 (SNPINDEX: ^GSPC) index hit record highs. Despite the current market optimism, picking stocks based solely on a few economic metrics can be risky. Instead, investors should consider data across various aspects of the economy -- such as employment, inflation, and production -- and make sure they aren't missing the bigger picture. Economic metrics can be deceptive Consider the employment rate in June 2025. Although it appears healthy, the economy is currently facing critical problems, including a decline in overall labor force participation and slower job creation. The labor force participation rate has fallen to 62.3%, the lowest it has been since late 2022. Private sector nonfarm payrolls increased by only 147,000 jobs in June 2025, far lower than the 180,000 to 200,000 jobs per month estimated to be required to maintain growth in the working-age population. While inflation appears to be under control based on headline CPI numbers, the core CPI (excluding food and energy) rose 2.9% for the 12 months ending in May 2025. Inflation persists in areas such as insurance, medical services, and housing. Industrial production numbers are also mixed. While manufacturing grew 4.8% in the first quarter of 2025, manufacturing production declined by almost 0.5% in April, primarily due to a decline in motor vehicle output. Manufacturing output rose just 0.1% in May 2025, as an increase in motor vehicle and aircraft output was offset by weakness in other areas. So, does the economy seem strong enough to match the market exuberance? I don't think so. Analyzing historical case studies To demonstrate how relying on lagging indicators alone can prove problematic for investors' portfolios, we can analyze two specific case studies. In June 2020, a record jobs report showed that 4.8 million nonfarm payroll jobs were added and unemployment had dropped to 11.1% from the expected 12.4%, sending the markets soaring. Investors were optimistic, anticipating a strong rebound in the coming months following the pandemic-related lockdowns. However, the market exuberance was short-lived, as megacap tech stocks primarily experienced a dramatic decline in September 2020. Wall Street had overlooked the acceleration of COVID-19 cases in certain key states and low overall consumer confidence. The jobs report was also based on data collected during the initial reopenings, which included the temporary rehiring of workers and did not account for job suspensions and rollbacks in regions experiencing a resurgence in COVID-19 cases. The challenging macroeconomic conditions raised concerns about the tech stock valuations being too high. Then, in March 2023 markets surged due to cooler-than-anticipated inflation numbers and increased expectations that the Federal Reserve would ease its aggressive interest rate hiking. This led to capital flowing into rate-sensitive sectors such as technology, consumer discretionary, and communication services. However, while the headline CPI was cooling down, shelter costs increased month over month by 0.6% in March 2023. Although this was the smallest monthly gain since November 2022, it still resulted in an 8.2% year-over-year rise in shelter costs. Additionally, the March 2023 CPI reading of 5% was still 2.5 times the Federal Reserve's target of 2%. Hence, contrary to market expectations, the Federal Reserve delivered its 10th consecutive interest rate hike in May 2023, raising the benchmark rate to 5%-5.25%, the highest since August 2007. Not surprisingly, the very sectors that had benefited from the March rally, including housing stocks and fintech companies, suffered the most after the rate hikes were announced. These case studies highlight the importance of thoroughly examining lagging indicators to comprehend the investment landscape accurately. Stocks for the current cautious economic environment In this environment of a softening labor market, with declining job openings, reduced labor force participation, and persistent uncertainty surrounding tariffs, it makes sense to take stakes in fundamentally strong companies with recurring revenue streams and high pricing power. Leading cloud and enterprise software player Microsoft (NASDAQ: MSFT) could prove to be a smart pick in periods of economic ambiguity thanks to its diversified business model, recurring revenue streams, and strong balance sheet. The company plans to invest $80 billion in AI infrastructure and data centers in fiscal 2026 (ending June 30, 2026), aiming to capture a significant share of the AI market, which is estimated to be worth nearly $1.8 trillion by 2032. Microsoft's increasingly dominant AI ecosystem, which includes Azure AI services, Copilot virtual assistant integrated across its various software offerings, and AI-powered personal computers, is expected to be a significant growth catalyst even in a challenging market environment. Custom data center chip and advanced networking infrastructure provider Broadcom (NASDAQ: AVGO) is another stock that is benefiting dramatically from the ongoing AI infrastructure boom. The company's AI-related revenues surged 46% year over year to $4.4 billion in the second quarter of fiscal 2025 (ending May 4, 2025). Broadcom's AI networking business also grew over 170% year over year in the second quarter, capturing 40% of total AI revenue. Analysts expect the company's AI revenue to be $15 billion to $18 billion in fiscal 2025, driven by rising demand for large AI clusters from its existing three major hyperscaler clients, as well as the addition of new hyperscaler customers. Furthermore, Broadcom's $61 billion acquisition of VMware has also strengthened the company's position in the hybrid cloud and networking software space. Do your homework Relying on economic headlines for investment decisions can prove harmful in the long run. Instead, it makes sense to triangulate economic data and pick stocks that have low downside risk in the current environment. By avoiding potential traps, you can build a solid portfolio for long-term wealth generation. Should you invest $1,000 in Microsoft right now? Before you buy stock in Microsoft, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $671,477!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,010,880!* Now, it's worth noting Stock Advisor 's total average return is1,047% — a market-crushing outperformance compared to180%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of July 14, 2025
